A very slightly amended version of Samuel Brittan's lecture given to a conference of the Institute of Contemporary British history, April 1997 on the subject of Whitehall's almost forgotten, but still relevant, policy reappraisal of the 1960's.

Introduction

It is an honour to be asked to give the keynote address on a subject named after a chapter in my own book on the Treasury¹. This chapter dealt with the policy reappraisal conducted under the Conservatives in the early 1960s - that is in the last few years of their first postwar term of office which ran from 1951 to 1964 and which Labour succeeded in dubbing as "the thirteen wasted years".

Because of my own role in this conference, I hope that the audience will be indulgent if I use the vertical pronoun and quote from my own works rather more than would otherwise be in good taste. Since the opening of the public records, researchers have been able to throw more light on events. But in my biased view, the main effect is to provide more detail rather than to overthrow my original outline. (This is in strong contrast, for instance, to the the year 1968, where the recent opening of the archives has revealed a depth of Treasury panic, apparent in the absurd contingency plan "Operation Brutus" which was previously quite unsuspected).

What was the Problem?

What was the problem with which the reappraisal was concerned then? It is difficult even with hindsight to be sure. Let us start with UK growth rates. In retrospect this was a Golden Age, which achieved far higher growth than experienced during any sustained period before or since. Over the whole period 1950-73, real GDP per hour worked almost doubled. Output per head rose by an annual average of 2.9 per cent between the cyclically comparable years of 1955 and 1964. There was then some slight acceleration to 3.1 per cent in the period 1964 to 1973, despite all Harold Wilson’s problems with the pound and Edward Heath’s problems with the unions.

The complaints arose from international comparisons. In the course of the later 1950s it became fashionable to circulate league tables showing that the UK had slower growth rates than other European countries - although not, interestingly enough, slower than the United States. Harold Wilson made great play with such tables both as Shadow Chancellor and as Leader of the Opposition. But it was not all party politics. Such tables were frequently cited by Andrew Shonfield, the well known economic writer. Academics soon got in on the act; and the Public Record documents show that Conservative leaders were "concerned" in a mumbling upper class way.

To this day there would not be agreement on how far Continental countries were really doing better and how far they were simply catching up from wartime devastation - the UK was, of course, never invaded. In his authoritative study Professor Nicholas Crafts maintains that, even in the Golden age of 1950-73, a UK growth rate up to 1 per cent per annum better than that achieved would have been possible with better policies². This is a large difference.

The pressures for reform cannot be gauged only from statistical analysis. There was a widespread feeling that, despite the expansion of educational opportunity and increased prosperity, that the country was still run in a class-ridden way and that what mattered was not what you knew but whom you knew - and possibly how you held your fork. One best-selling book was Michael Shanks’s The Stagnant Society. The feelings of frustration of first generation graduates emerged very clearly in John Osborne’s play Look Back In Anger.

I remember how the electrical industry was dominated by three vast bureaucracies. One of them, AEI, was run by Lord Chandos who gave his real name Oliver Lyttleton to part of the of the National Theatre. One approached him through a series of carpeted rooms each larger than the other. (Now there is only one such concern called GEC, run from a small set of offices in Mayfair). A journalist knew that if he said or wrote anything that displeased, he might be reported to his editor - or more probably - the managing director whom Chandos was more likely to know socially. Indeed I was once so reported by a director of the Bank of England whom I had the temerity to ask for some factual evidence to back the observations he was making off the record.

If there is one word which summarises everything that the reformers of the 1960s were opposing it is "fuddy duddyism". To my mind it was associated with the Bank of England as an institution, and with the setting up of the sterling areas and the sterling exchange rate as totem poles which could not be rationally discussed but to which all else should be sacrificed.

Reappraisal under the Tories

When did the policy reappraisal begin? There was a reason why I was anxious to insist on a reappraisal that began in 1960 if not earlier. For to the mass of political commentators the reappraisal began with Harold Wilson’s Labour government of 1964-70 and the white-hot technological revolution which he claimed to inaugurate.

I had voted Labour in 1964 because I hoped, without much confidence, that Wilson would honour his own pledge and strike a blow against nuclear proliferation by abandoning the British deterrent. But on the economic side I had backed the growth policy of Reginald Maudling (Chancellor from 1962 to 1964) as the most radical show in town and was horrified that the incoming Labour government shattered confidence by shouting from the rooftops about the overall payments deficit it had inherited - very minor by later standards.

This all may seem uncannily familiar. For we are waiting to see if New Labour has learned its lesson and can avoid shouting from the housetops about a non-existent or exaggerated financial crisis - this time fiscal more than balance-of-payments.

[As Prime Minister, Tony Blair never missed an opportunity to expatiate at Question Time that his problems arose from the mess he inherited. And Chancellor Gordon Brown disputed that he both inherited an unprecedentedly good overall economic situation and benefited from Tory structural reforms. But these complaints were politically par for the course. The main point is that the Blair Government withstood the temptation to shout about an inherited crisis from the housetops, as the Wilson government of 1964 did with such disastrous effect. And for this small mercy, we should be grateful]

But life always has its little ironies. I can still recall how William Rees-Mogg, who, in his Sunday Times articles, had completely swallowed the white-hot technological revolution rhetoric, was taken aback when Harold Wilson appointed Frank Cousins, the head of the Transport and General Workers Union, as his first Minister of Technology.

Two Schools of Reform

A suggestion made in the note announcing this conference is that the reappraisal was concerned with enlarging the role of government in general and the Civil Service in particular. There were no doubts some reformers who did believe exactly that - combined with unmitigated contempt for the Whitehall machine as it existed in the real world. The name of Thomas (later Lord) Balogh, whom Wilson appointed as a Cabinet Office adviser, springs to mind. Most of the reformers were not however particularly concerned with boosting central government, except in some cases as a by-product.

There were at least two streams of thinking behind the reappraisal, which have never been adequately distinguished. There were those, like Frank Lee, Treasury Permanent Secretary until his heart attack in 1962, who believed that the British economy needed above all more competition. This was sometimes allied with the belief, associated in the public mind with the late Professor Frank Paish, but developed independently in the Treasury, that if the economy could be run with a somewhat wider margin of unused capacity - for instance with 2 to 2.5 per cent unemployment instead of 1.5 per cent - the problems of cost push inflation and balance of payments crises associated with it would be much easier, and that there would be no need to be quite so dependent on incomes policy.

A supporter of the competitive approach might be tempted to say that Frank Lee and Frank Paish were right and that demand growth would have been steadier as well as safer if politicians had not insisted on running the economy to the limits of capacity. Certainly the abuse levelled by the media against Paish is in retrospect richly comic in view of the later toleration of far higher levels of unemployment than the 2.5 per cent levels he advocated. The modern view, however, is that things are much worse than Paish believed. For the attempt to run the economy without a minimum margin of unused resources leads not just to inflation but to accelerating inflation and thus to breakdown. But - and here is where Paish was wrong - we do not know what that minimum is. The moral surely is that economic policymakers should not have objectives for physical quantities. Demand management cannot be abolished, but it needs to be conducted in nominal terms.

A more radical shock therapy than anything contemplated in the 1960’s had in fact been advanced and rejected by Winston Churchill’s Cabinet earlier in the 1950s just after the Tories had returned to office. This was the "Robot" plan to float the pound and run the economy mainly with the aid of interest rates. It has taken 40 years for policymakers to return to give this approach (of combining a floating exchange rate with interest rates as the main domestic regulator) a try.

But - going back to the 1960s - there is no evidence that Frank Lee, who prided himself on being a "realist", ever tried to revive Robot. As an old Board of Trade hand, his efforts were devoted to liberalising international trade and to trying to persuade ministers to see the virtues of what was then called the Common Market. Unfortunately he did not live on the same planet as General de Gaulle who so dramatically pulled the rug out from under the negotiators for geopolitical reasons.

The Attack on Stop-Go

The second school of 1960s reformers was more concerned with avoiding stop-go policies to sustain a higher growth rate. Members of this school, to which I belonged, varied in their political outlooks and detailed preferences. Their policies were called "growthmanship" by their detractors. My own priority was to float sterling so as to allow the government to stimulate expansion of real demand.

There is an obvious formal similarity between the medium-term objective formulated in the 1960s and those which later became current in the 1980s. The sort of person who favours a medium-term target for the growth of real output or real demand can easily become converted to a medium-term objective for the money supply, the price level or the growth of nominal demand. The kind of person who is sceptical of one is likely to be sceptical of the other.

Of course, schools of thought were never as clear cut as commentators might like them to be. For all Lee’s stress on competition, I remember him saying that many British engineering companies were much too small; and this train of thought was behind the later ill-fated merger that produced the British Leyland merger. Moreover there were cross-currents. Some of the believers in more competition were demand expansionists. And there were interventionists who were very cautious on macroeconomic matters, including one former economics lecturer called Harold Wilson.

Crafts’ diagnosis of the reason for the British lag gives more comfort to the more competition school than the demand expansionists. The faults lay in his view in misdirected interventionism, ineffective exploitation of technological change and unreformed and deteriorating industrial relations. He is very critical of the unusually high share of total investment carried out in the nationalised industries and the astonishingly low rate of return on it. He is even fiercer about the "ferocious merger and takeover boom of the 1960s in which pursuit of size rather than efficiency or long term investment was for many the best survival strategy" - a mania which as mentioned already was shared by both the interventionist and some of the more free market school of reformers, as in the case of Lee.

Demand and Supply

There were and remain two aspects of economic policy. There is demand management - now more often called macroeconomic policy. (In current terms this is the subject of the monthly interest rate decisions by the Bank of England’s Monetary Policy Committee.) Then there is the question of improving the supply performance of the economy - which, if accomplished would increase the rate at which demand could safely be allowed to grow.

We tend to forget today that Keynesians came under a lot of fire from the Left in the 1960s for being too concerned with global financial decisions and not enough with detailed, physical, industrial intervention. Indeed the first 1964 edition of my book was a defence of the global financial approach, to which I wanted to give a more radical twist.

The demand and supply approaches could be personified by Reginald Maudling, who was chancellor during the so-called dash for growth in 1962-64, and Edward Heath, who, during the one year - 1963-64 - that Lord Home was prime minister, rejoiced in the title of Secretary of State for Trade, Industry and Regional Development and President of the Board of Trade.

Just to give a flavour of these personalities - not of their views, and begging you not to take the comparison too seriously - Maudling was a sort of cross between Nigel Lawson and Kenneth Clarke, while Heath, in those days, was rather like Arthur Cockfield when, as British EU Commissioner, he slogged through all the detail of establishing the Single Market.

Maudling hardly bothered to feign an interest in the numerous supply-side proposals that emerged from the National Economic Development Council’s Orange Book. I remember saying to Armstrong that one needed to stick pins into Maudling to get him to respond. "Very long pins", was Armstrong’s reply.

On the other hand, Maudling was intent on breaking out of the cycle of stop-go. Like all other periods of excessive demand growth, the Maudling boom of 1963-64 was the result of misdiagnosis of the state and prospects of the British economy rather than a deliberate taking of risks. But he was determined to respond to the next sterling or balance-of-payments crisis without imposing a long economic stop.

My support for Maudling was based on the hope that, if it came to the test, he would allow the pound to float rather than rely on demand restriction alone. I never wrote this, fearing that any such suggestion would only force him into a denial. But it was just this thought which provoked the then Governor of the Bank of England, the Earl of Cromer, to ’phone Conservative MPs to tell them to vote for Heath in the 1965 contest for the leadership of the Conservative Opposition.

The fact that Treasury officials were opposed to growthmanship has misled some into supposing that nothing happened before the autumn of 1964. But Treasury officials were equally opposed to growthmanship under the Labour government. The support for a more expansionist approach came to ministers from business circles and from academics. Its institutional forum was in the NEDC, which was probably just as effective a lobby for growth as the ill-fated Department of Economic Affairs set up under George Brown was ever to be.

The Supply Side

Heath could not have been personally more different to Maudling. His heart then was entirely in the policy minutiae involved in, for instance, the abortive Macmillan attempt to join the Common Market which he led, or his own successful attempt to abolish retail price maintenance. He was originally scornful of incomes policy and would have supported Frank Lee on the need for more competition and a firmer control of excess demand.

His convictions arose not from any philosophical commitment to free markets as an instrument of choice but to his belief that British industry needed a shock of one kind or another. In this light, his later conversion to incomes policy is more understandable.

A constant preoccupation of supply siders was the need for an active regional policy. I was sufficiently influenced by the tide of opinion to give this some unenthusiastic support and I cited arguments of economists who believed that the economy could be run at a higher pressure of demand if that were more evenly distributed across the country. But, in truth, I was utterly bored by the whole subject and thought it absurd to have radically different policies for regions one or two hours train journey from each other.

In contrast to all the controversy on the demand side, there was a common framework with which most economists approached the supply side. They did not see any alternative even then to using markets to decide what should be produced and by what methods. But markets could fail because of what economists called externalities. They tried to explain to this to the lay person as spillover costs and benefits - pollution being an example of the former and industrial training of the latter. Markets could also be ossified through lack of competition - not only cartels and tariffs, but through the operation of the old boy network in an economy much less open than today’s.

Those who deny that the real revolution began before the change of government think mainly of supply side measures. It is quite true that legislation for, for instance, industrial training levies and for redundancy compensation was introduced by the Wilson government. But they were largely based on the thinking which had been stimulated under the previous government and especially by the National Economic Development Council.

Nevertheless, officials working on the supply side were much less likely to be conscious of taking part in a reappraisal than the far smaller number who were allowed to discuss demand management, policy towards sterling and the like. The latter is by its nature centralised. The officials concerned with establishing regional agencies or the minutiae of trade negotiations would inevitably adopt a case by case approach, and not be aware that they had engaged in a campaign to deal with adverse externalities that were impeding markets. It needed the shock of a change of government for them to realise that anything unusual was happening.

Perhaps supply policies divide into three categories. There are those which are still on the agenda today, such as improved training or measures to promote labour mobility. There are those which are on the agenda but mean the opposite of what they did in the 1960’s, such as industrial policy, which then meant "picking winners", but which is today more likely to mean promoting competition. Finally there are those which have disappeared completely such as incomes policies.

A genuine continuity with today’s agenda can be found in the attempt to give a medium-term focus to public expenditure, which stemmed from the unpublished Plowden Report of the late 1950s and which first saw the light of day in the Conservative Government White Paper of the early 1960s. This was bedevilled in the early years by planning totals in "funny money". Understanding what this meant was a full-time job which inserted a layer of pseudo-technicality into what was fundamentally a political decision.

But it was difficult to get away from funny money until there was a prospect of the inflation rate coming down to lowsingle figures. The essential Plowden insight is that this year’s expenditure is largely determined by decisions taken several years ago and that there is little that emergency economy drives can achieve without severe disruption. This is still valid.

An example of ill-fated modernisation was the regime of target rates of return - and later of marginal cost pricing - for nationalised industries. There are technical reasons why this approach was flawed. But basically these were attempts to make nationalised monopolies behave like imaginary competitive industries. It was like painting white stripes on the back of a donkey and calling the result a zebra.

The Delusion of Incomes Policy

Incomes policy is an example of something now off the agenda. It can be seen as a last desperate attempt to avoid running the economy with a higher margin of unemployment. It came to grief for two main reasons. One was that there is no such thing as the wage rate, with a capital W, in terms of which economists had thought out the policy. There were, even in the more centrally regulated labour markets of the 1960s, thousands of specific wage rates which were themselves further affected by myriads of bonuses and other special payments.

What the Treaury would ideally have liked would have been to have left these differentials to custom and the market and to have simply divided the final result by a fixed number to make it less inflationary. This would no doubt be an easy exercise for a graduate student of mathematical bent. But you do not have to be over-subtle to see that this is something which can only be approximated to in reality. For other than a brief emergency, an incomes policy involves trying to regulate all differentials - which is fortunately beyond human power.

Secondly, and more profoundly, an incomes policy involves a deal with the unions, who want something in return. According to the logic of the policy, virtue was its own reward. Or more accurately, the reward would come in lower inflation, fewer payments crises and faster economic growth from which all would benefit. Yet any Danegeld given to the unions by way of price control or punitive tax rates on higher income earners could only undermine the economic results. But inevitably, as the policy went on, more and more Danegeld had to be paid for less and less union co-operation.

I have to confess to writing quite a bit about incomes policy at the time and even had a sentence or two in favour of import controls as a fallback device. These were to my mind second or third best alternatives. There was also an ulterior motive. Editors and publishers - except of very specialised material - would not then or now take a diet composed entirely of monetary, fiscal and exchange rate policy. They were interested in industrial disputes, breaches of the pay pause and similar headline material. The more "up market" ones insisted on discussions on whether there were enough computers in Whitehall and whether departments were sufficiently geared for growth.

An example of policies which have gone into reverse is the payroll tax. This had two phases. It was proposed as a demand regulator by Chancellor Selwyn Lloyd in 1961, but never used because of business and populist objections. It was introduced as a would-be permanent measure under the subsequent Labour Government in Nicholas Kaldor’s form of a Special Employment Tax (with a rebate for manufacturing) in 1966. In both cases an underlying thought was that the British economy was held back by a shortage of labour in manufacturing and that there was a need to shake-out surplus workers elsewhere so that their productive efforts could be used in industry.

There was a transitional period in the 1980s when a labour shake-out was seen as a necessary evil in the course of a free market cure. Now the wheel has come full circle and reformist ideas are for payroll subsidies, whether temporary or permanent, to encourage employers to take on workers.

Economists sometimes strive to make their theories less arid and abstract by trying to particularise about structural features, such as manufacturing labour shortages 30 years ago or surpluses of unskilled labour today. In so doing they risk becoming fossilised by the fashion of the moment. Most of these so-called structural problems would yield to a rigorous use of the price mechanism softened by compensation for those who lose out most.

Conclusion

It is time to summarise. There were many elements of common sense in the reappraisal of the 1960s, which dealt with problems with which we are still grappling. But if we stand back from the detail and take a broad brush, it was fundamentally along the wrong lines.

A real modernising British government should have revived the abortive Robot Plan of the 1950s to float sterling and taken the opportunity to liberalise the financial sector 20 years before it happened. This would have ended the balance-of-payments obsession and would not have prevented a later re-fixing of the exchange rate, either in the European Exchange Rate Mechanism or eventually in European Monetary Union.

I wrote at the time that supply side policies could be regarded either as sensible planning, making use of markets, or as measures to remove obstacles to a competitive market economy. But I now think that this formula was too easy a resolution which allowed one to forget the congenital weaknesses of intervention which are not amenable to administrative reform, as they stem from the political process. I now wish I had nailed my colours to the slogan of the German Economics Minister Ludwig Erhard, "Prosperity Through Competition".

As for the role of the Civil Service, I am afraid I do not agree with those who bemoan the possible passing of a large centralised body. Competition has its role here. It would be nothing but beneficial for departments to have their own recruitment methods and pay scales, however untidy this would look on a line chart.

I have devoted my time to policy rather than to the machinery of government. But I cannot help feeling that we have had every fashionable "reform" except those which really matter. Take one seemingly small example in the only department which I have ever studied in detail, namely the Treasury. It has up to now always rejected the idea that short-term macro-economic forecasting should be contracted out to non-government organisations. [It still does, despite the transfer of operational responsibility for monetary policy to the Bank of England]. This might seem a small change, but it would alter the Treasury’s culture. It would certainly be far more useful than either the boosting of that department later in the 1960s or the slimming of it in the early 1990s to a point where it could neither fulfil its traditional role of regulating public spending nor take a lead in supply-side policies properly understood. [Gordon Brown has tried to remedy the latter failing partly by bringing in more outside policy advisers, but even more by asserting his leadership over other departments in economic policy formulation.]

Finally: the refrain that advice given by civil servants to ministers should be on a par with the secrets of the confessional has recurred throughout my journalistic career. Yet all the talk of open government is so much hot air while the Whitehall line remains that officials will not give frank advice if it is liable to be reported [a line that was still evident in the summer 1999 version of the Labour Government’s Freedom of Information Bill]. It is just as easy to argue that better advice would be given if those who provide it can be held to account. Power without responsibility has been the privilege of the harlot down the ages.

Notes
1 Samuel Brittan, The Treasury Under the Tories (London. Penguin, 1954). Later edition entitled Steering the Economy, (London, Penguin, 1970).
2 Nicholas Crafts , Britain’s Relative Economic Decline 1870-1995, (London, Social Market Foundation, 1997).